The Algebra of Need and the Calculus of Greed

Why gasoline prices are high, and the myth of the “struggling gasoline refinery”

In January of 2006, president Bush stated bluntly: “America is addicted to oil.” That’s a powerful statement, because by definition an addiction is a dependence on a harmful behavior or substance that a person is powerless to stop.

And that’s the problem with gasoline: we need it, and without it, we are powerless (or at least our cars are powerless). If the price of strawberries goes up to $12 a pint, we simply stop buying strawberries, but we can’t stop buying gasoline. No matter how high the price of gasoline climbs, most of us have little choice other than to shut up and pay up. As president Bush observed, we are addicted. The drug is gasoline, and the pushers are the Big Oil companies.

Junkies and the Algebra of Need

It therefore behooves us to quote the famous heroin junkie William Burroughs, who talked about the “Algebra of Need” regarding the relationship between the pusher and the addict. The pusher understands that once a customer becomes an addict, that it is a wise business practice to control the addict by limiting the supply. while making certain that a supply is always available.

Without a steady supply of heroin, the junkie can actually die from withdrawal. Similarly, the United States, when confronted by a loss of gasoline, is faced with the possibility of economic death. We are completely, 100% dependent on gasoline and oil. Our society can not function without it, and like that heroin junkie, we’ll pay any price to get it, and if necessary, use violence to maintain our supply.

The smack on Bush Sr.

George Bush Senior was blunt when it came to the reason behind the first Iraq War: it was because our economy desperately needs oil. He said: “our jobs, our way of life, our own freedom and the freedom of friendly countries around the world would all suffer if control of the world’s great oil reserves fell into the hands of Saddam Hussein” (source). For Bush Sr. the war wasn’t about freedom and human dignity: it was about maintaining our supply.

"Inelastic Demand" why junkies can only shut up and pay up.

Economists call the inability of an addict to cut consumption, “Inelastic Demand.” If demand is elastic, it means that consumers can choose to stop using a product, but when it is inelastic, like gasoline, it means they have no choice. Dr. Gerard Tellis of USC actually has a formula for calculating demand based on price. According to Tellis, the general rule for calculating demand is that if prices increase by 1%, that demand will drop by 2%. (source )

The Calculus of Greed

Okay, if you raise your price by 1% and you lose 2% of your business, that’s not good for business, right? Simple math proves that if you raised prices by 1% a day you’ll profit for 50 consecutive days, but eventually you’ll have zero customers. In that situation, the math is simple: higher price = less revenue = fewer customers. But with an inelastic commodity like oil, the Calculus of Greed functions like this: Supply Shortages = Higher Profits.

Here’s why:

Since January of 2004, our gas prices have increased by 75%, In this case Calculus of Greed is “Shortages = higher profits.” The reason for this is that there is not enough competition at the refinery level. California, and the United States, could import all the oil it wanted, but unless it gets refined into gasoline, it will never reach the market.

The U.S. oil industry claims that not a single new refinery has been built in the United States in 30 years, as if to suggest that NIMBYs and environmentalists have halted all construction since 1976. The truth is that the industry has little interest in building new refineries (source). More refineries mean more competition. More competition means more gasoline, and more gasoline means lower profits. In fact, in California, the industry has moved to aggressively shut down refineries even when they are wildly profitable (see Shell Bakersfield).

One of the major reasons Californians pay some of the highest gas prices in the nation is because there is not enough competition at the refinery level. California’s refineries have all settled into very comfortable market niches. They recognize that competition is bad for the Calculus of Greed, and they are very careful to avoid creating surplus.

As for the Algebra of Need, you can expect the oil industry to do everything in its power to keep us hooked on gasoline by making certain that our elected officials do not explore meaningful ways of weaning our dependence on oil. Right now we are being conditioned to think that $3 a gallon gas is “cheap.”

It’s basic big business math. And that's the straight dope from UCAN.

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How can you fight Big Oil’s abuses of California markets? You can start by using less gasoline with this free guide, and by joining UCAN.

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